However, as evidenced by Berkshire’s growing ownership of their cannibals like AXP, it can be a very good thing in terms of increased ownership and claim on those owner earnings. Amazing that Berkshire owns 20% of American Express now due to their buybacks
Sure, but consider this alternative reality:
Instead of the buybacks, some of which were done at unreasonably high prices,
the money had instead been paid out as dividends to Berkshire, and Mr Buffett had allocated that capital for the last 30 years.
Maybe some of it was used to buy more Amex stock when it was particularly cheap, maybe not.
Would we be better off, or worse off?
Would a share of Berkshire be worth more, or less?
I can’t think of any solid argument for “less”.
Buybacks are no magic bullet.
On average, across all firms, they’re done at around fair value and thus add zero value to the continuing shares.
Sometimes they’re done at a deep discount, but usually the appropriate reaction is “nothing much to see here”.
Typically the best you can say about them is “better than the alternative available opportunities to deploy cash”.
I’m very much in favour of them in that situation, but I don’t expect that to result in much value creation.
Making the best of a tough situation does not make it a good situation.
I don’t think continuing shareholders got richer by Apple having bought Apple shares at over $175 recently. (if they did). Quite the reverse.
Not because the price is now lower, which is meaningless, but because I personally don’t think they were worth that much earlier this year and it was therefore value destruction.
A fully rational capital allocator would cycle between dividends and buybacks based on the share valuation.
According to the gazillion posts here this is “everybody’s” opinion about Google… Because only here are knowledgeable market participants? And all others are idiots?
Though there is much to be said in questioning the consensus,
I think there is also much to be said for never assuming that prices are EVER rational.
The company might be worth a lot less than I think it is. I’m often wrong.
But I don’t think the fall in the price, in general or in any specific situation, adds any evidence whatsoever to that discussion, either way.
Most prices are set by pretty active traders with pretty much no interest in the value more than a year later.
Few of them are even interested in the value today.
So, yes, be entirely open to the idea that Mr Market is an idiot today. It’s true more often than not.
As an aside, I don’t think Google is a spectacular table-pounding deal at current prices.
Solid prospective returns on a solid firm, yes. And that has been somewhat rare in recent years, so I’ve bought some.
OK, so taking the Jan 2023 GOOGL 2100 PUT, you have a bid/ask of 214.10/224.40, assuming you could get the BID (you can do better, but it makes the number simpler):
For each contract you get 214.10 per share, and the closing price of GOOGL being 2116.10, thus you need to put up (2116.10 - 214.10) = 1902.00 per share. If the option expires worthless, you net 11.26% or annualized (1.1125^(365/242))-1 = 17.45%.
The caveat here is that each contract is for a block of 100 shares, so you would get $21410 per contract, and need to have $190K at risk. That is a rather big chunk of change per contract!
A fully rational capital allocator would cycle between dividends and buybacks based on the share valuation.
Agreed!!
But this would have to break the mindset that “dividends are forever” and that cutting them is a sign of weakness and distress.
I like what some of the O&G companies are doing now. They have “permanent” dividends - good times or bad except in extreme distress" - and “special” dividends which are paid out in good times but not otherwise.
The drawback to dividends is the tax is immediate. OTOH, IF price responds to the higher earnings per share from buybacks, THEN one can choose when to cash in and pay their taxes. That appeals to a lot of people, particularly BRK shareholders, who already have all the taxable income they want. And with the possible bonus of passing on the shares to heirs on a “step-up” basis, further delaying the tax bills.
If folks have better reinvestment uses for the money, then the “special” dividends would seem best.
If tax deferral is preferred, then buybacks - but only when below IV. Otherwise, hoard the money and have shareholders who understand and agree.
Because only here are knowledgeable market participants? And all others are idiots?
Good question. My answer: no, they’re not all idiots. As the SNAP warning revealed, and as was intimated on the SNOW cc tonight, so-called “consumer-facing” companies are feeling the macro-headwinds and are pulling back on advertising and other nonessentials until the turbulence settles. It would not surprise me to see Google show some transient weakness, with the stock dipping yet a bit more.
So I will sit on my GOOG for the time being but am ready to buy more fairly soon. I won’t sell, however, for reasons Jim outlined. I don’t want to have to make both sell and re-buy timing decisions correctly.
… and need to have $190K at risk. That is a rather big chunk of change per contract!
Well, yes, there is that disadvantage.
At the very least it raises the question of what a reasonable portfolio allocation might be for us non billionaires…
But cheer up.
If the stock price is still low in about five weeks, the upcoming 20:1 stock split will fix that problem.
Or, if one is impatient and wants to jump in today, a buyer of one of those calls now will soon have the ability to close the position in 5% increments.
But this would have to break the mindset that “dividends are forever” and that cutting them is a sign of weakness and distress.
Maybe that would be a good thing?
Investors could learn to accept that a drop from one holding is ok as long as income across the whole portfolio is looking good. Or that a cut in one year is ok, as long as the general trend is up.
We know search and YouTube are monopolies. Fabulous.
Well, I don’t think it’s necessarily good to see either of these–but especially YouTube–as monopolies.
Why? Because Google is in the business of selling advertising. And there are myriad ways a business can allocate its advertising budget. Sure, if it choses to do that via search, Google is top of the heap. But even there, Amazon accounts for a non-trivial amount of searches for goods. And as for YouTube, is advertising there that much different than on Facebook or TikTok or…?
Don’t get me wrong. I think Google is a phenomenal business, and I’ve made it my second largest holding. But I think it’s dangerous to conflate being a monopoly in search or in online video with being a monopolist in the generation of its revenue. Same idea with Facebook; it has a monopoly in its sphere of social media, but not in advertising.
I think it’s dangerous to conflate being a monopoly in search or in online video with being a monopolist in the generation of its revenue. Same idea with Facebook; it has a monopoly in its sphere of social media, but not in advertising.
I think the important point about Google’s stranglehold on advertising is not that people can’t advertise elsewhere, but that it’s where people have to advertise if they want to make sales, since it’s where the eyeballs are.
As long as people are searching on Google (as 92% of the world does), they will see Google ads. The ads are the same on Bing (3% share) or on Yahoo or Baidu or Yandex or DuckDuckGo (1% each), and much cheaper of course, but there’s no point in advertising your lawnmower on Bing if people are searching for lawnmowers on Google. So as long as Google (or Facebook) have near monopolies in their respective online video or search engines (or social media), they will get the lion’s share of advertising dollars as well.
I think commoncents33’s caution is illustrated by the position of newspapers in 1998 vs newspapers in 2004. A monopoly on local news did little to protect newspapers’ advertising profits. Google was able to offer advertisers pay per keyword (advertising to people who are already interested in a product) or pay per click (pay only if someone actually follows a link) instead of the shotgun approach needed to advertise in a newspaper. [As an aside, Craigslist then came and took the classified revenue away.]
Similarly to Google coming to the advertising business with the ability to tailor advertising to already-interested people, Facebook comes to the advertising business with the ability to tailor advertising by political affiliation, interest, what your friends and family have, and lots of other information.
Advertising is weird in that you can be the best at what you “do” but still not have a moat when it comes to what generates the revenue.